In 1950, amendments to the Social Security Act authorized, for the first time, federal payments to states for medical services for individuals eligible for public support. Ten years later, Congress passed the Kerr-Mills Act, which extended health care benefits to the "medically indigent": individuals over 65, not receiving Social Security’s Old Age Assistance, with income "insufficient to meet the costs of necessary medical services." Kerr-Mills established a "federal matching percentage" ranging from 50 to 80 percent of state outlays, varying inversely with a state’s per capita income–laying the groundwork for the Medicaid formula five years later. As a result, the least populous states, which tend to be the most hostile politically to the federal government, receive far more money per capita from the feds.

In the years between Kerr-Mills and the passage of Medicare and Medicaid, advocacy groups, government studies, and media reports highlighted how rising medical costs were creating widespread hardship, especially among the elderly. State officials complained loudly about the inadequacy of Kerr-Mills, which they mocked as "Cur-Mills." In response, in his first State of the Union address Lyndon Johnson endorsed programs that would support the "health needs" of older citizens, to be called "Medicare," and the poor, which would be known as "Medicaid."

Ever the politician, Johnson was far more interested in Medicare, which would immediately benefit the broad category of voters aged 65 and over, than in Medicaid, with its impoverished beneficiaries. Congress followed suit. In their prodigiously researched book on the history of that program, Medicaid Politics and Policy: 1965-2007, public policy scholars David Smith and Judith Moore report that legislative staffers could scarcely recall working on Medicaid and doubted that it took more than an afternoon of their time to draft. Johnson didn’t even mention Medicaid in his speech celebrating his signing of the legislation creating the two programs.

But one person did care deeply about crafting Medicaid: Wilbur Mills, the powerful chairman of the House Ways and Means Committee, who was eager to clear his name of the Kerr-Mills fiasco. A fiscally conservative Democrat from Arkansas, Mills feared that Medicare was the "entering wedge" for a nationwide "compulsory" system of health insurance for everyone. In response, he designed Medicaid to be both independent of Medicare and administered through a joint federal-state system, consistent with existing programs for the poor, making it less likely that Medicare would later expand to cover groups beyond the elderly.

Devolution’s Evolution

As political scientist Timothy Conlan documents in his superb book From New Federalism to Devolution, three Republican leaders–Richard Nixon, Ronald Reagan, and Newt Gingrich–defined the federalism debate in the post-Johnson era. All three made federal-state relationships a top priority, although they differed considerably in their motivations and in their particular proposals. Nixon’s sweeping "New Federalism" agenda, while partly aimed at weakening the federal bureaucracy and protecting his left flank politically, was mainly geared toward rationalizing roles and responsibilities rather than promoting anti-government ideology. That agenda included nationalizing welfare through a "family assistance plan," consolidating fragmented and overlapping programs through federal block grants, and creating a federal revenue-sharing plan to provide support to states and localities. Of those, he succeeded in passing only revenue sharing. But he also signed into law the Supplemental Security Income (SSI) program in 1972, which established a new federal income floor for the aged, blind, and disabled. He also greatly strengthened and expanded the food stamp program with the creation of uniform federal standards for eligibility and benefits. SSI and food stamps, not incidentally, are widely considered much more effective programs than counterparts that rely more on states for funding, rule setting, and implementation. On matters related to federalism, Nixon’s legacy is one liberals generally applaud.

Reagan also had big plans for realigning federal-state relationships, built around what he called "a quiet federalist revolution." In his case, though, the goal was ideological–to remove the federal government entirely from a broad swathe of domestic activities while discouraging states and localities from picking up the slack. Reagan eliminated Nixon’s revenue-sharing program, slashed grants to state and local governments, and slowed spending on Medicaid and other safety-net programs. In addition, the large federal deficits created by his 1981 tax cuts and heightened defense spending also became an ongoing justification for continued austerity.

One largely forgotten Reagan initiative was a 1982 grand bargain that would make the federal government entirely responsible for financing Medicaid in exchange for giving states responsibility for more than 40 other federal aid programs, including Aid to Families with Dependent Children (AFDC). Back in 1969, again in 1977, and yet again in 1981, the U.S. Advisory Commission on Intergovernmental Relations, which comprised officials in all levels of government, had recommended that the federal government assume full financial responsibility for all public assistance programs, including Medicaid. The Commission argued that its ideas would greatly improve an intergovernmental system that had grown "more pervasive, more intrusive, more unmanageable, more ineffective, more costly and above all, more unaccountable." While Reagan’s plan proposed basically the inverse–moving programs to the states, with the lone exception of Medicaid–few disagreed with the need to do something dramatic to repair a deeply flawed system of federalism. The "sorting out" idea unraveled quickly, though, largely because of opposition from state officials.

The last big flurry of federalism activity occurred during the Clinton Administration, after the cataclysmic 1994 mid-term elections that swept Democrats out of both houses of Congress for the first time in 40 years. Although the GOP’s "Contract with America" didn’t explicitly mention federalism or devolution, almost all of its planks were intended to weaken the national government, including a Constitutional amendment to balance the budget, limits on "unfunded mandates," welfare reform, and regulatory reform. Newt Gingrich articulated his mission in even more extreme terms than Reagan. "We have to decentralize power out of Washington, D.C., and disperse power," he said. "That means it actually goes back to the people from whom it comes."

The budget resolution that passed in the House in 1995 would have cut domestic spending by more than $1 trillion over seven years, while abolishing three federal departments, 14 federal agencies, and 69 commissions. The resolution would have eliminated or consolidated 283 federal programs while converting an assortment of activities into block grants to the states, including Medicaid, welfare, education, housing, law enforcement, and job training. The Senate’s resolution was similar, albeit somewhat less draconian in the extent to which it cut funding. Clinton vetoed the resulting reconciliation bill; the GOP shut down the federal government, resulting in a public backlash that doomed its grandiose plans.

Farewell, Welfare

One notable piece of federalism legislation that was enacted in 1995 was the Unfunded Mandates Reform Act (UMRA), intended to curtail the ability of Congress to impose costly requirements on states. The law essentially said that any mandate that would cost state or local governments more than $50 million a year, or private businesses $100 million, could be subjected to a point of order during debate. Legislators would then have to vote specifically on the issue of whether the benefit was worth the cost. Because many mandates actually came with matching federal funding, the "unfunded" label was highly misleading. But it served its rhetorical purpose in announcing that the feds shouldn’t treat the states unfairly. Yet most assessments of the law’s impact have been mixed. Although the use of mandates declined to some extent, the National Conference of State Legislatures issued a report in 2008 claiming that $131 billion in costs had been shifted to the states over the previous five years across a wide range of spending categories, notwithstanding UMRA.

In 1996 Clinton signed his momentous, controversial welfare reform law. The New Deal-era AFDC program, with its open-ended federal entitlement, was replaced with a capped block grant called Temporary Assistance to Needy Families. The block-grant approach allowed states to determine who would be eligible for cash welfare benefits, the size and nature of benefits, and the structure of work and training programs. At the same time, the federal government imposed new mandates on the length of time that benefits could be provided, child support enforcement, and other procedures. The welfare bill relieved the federal government of responsibilities it had carried for more than 60 years, shedding the Democratic Party of a political albatross while weakening support for struggling families in the process.

In short, the reforms to America’s system of federalism sought by Nixon, Reagan, and Gingrich fell well short of their ambitious aspirations. But from the Reagan Administration onward, the thrust of both debate and actual change has focused almost entirely on moving social-support responsibilities from the federal government to the states. Few political leaders at the national level have even broached the possibility of reversing course, so ingrained–and politically expedient–is the idea of shrinking the federal government and doffing off responsibility to the "laboratories of democracy." But with the states facing a perpetual fiscal crisis that’s potentially even more perilous than the widely recognized long-term budgetary challenges facing the federal government, that pattern needs to change.